Elliot Sirota

THE WORLD OF INTEREST RATES

The markets are trading on expectations that a withdrawal of monetary accommodation is closer than we think. The Fed is wise in remaining cautious in any case. No one wants to go back to declines if we move too fast. We need more time to deleverage in a more orderly fashion. That means we need more time for the economy to get back to effective growth. This translates into a sideways economy for an extended period of time. The average person's net worth is either gone or seriously depleted. Home values, for many, are upside down to what they owe. Unemployment is much higher than the data is being reported and everyone knows it.Now that the tax credit has been extended and expanded, this pending home sales report is expected to be stronger until the next deadline gets here. Despite the big decline, pending home sales remain higher than year ago readings. This report is a forward-looking report and considered a leading indicator for the housing sector. If we use the year-over-year data as our guide, pending home sales look like they have stabilized and even improved. Construction spending is still declining as reported for November but is still above year-over year levels like pending home sales. The ISM manufacturing index showed its fifth straight month of expansion, any reading above 50. The ISM services index also showed expansion for December and has slowly made its way back up from the lows in November of 2008.The official numbers are only a fraction of what the real picture is. Unemployment is about 17.0% when we include those that have dropped out of the search for jobs and those that are no longer receiving benefits. Investors know it, the government knows it, Wall Street knows it, yet no one wants to make an issue out of it. Weekly claims are still very high although they are below the worst when we were at the 500,000 range. There is little to no job creation and the Obama Administration is going to be even more pressured to focus energy here. The threat of terrorism has been distracting us from working on finding ways to stimulate employment and growth. Congress has to tighten its belt and stop the pork spending and put our resources into creating jobs. It appears that investors overlooked the unexpected November consumer credit numbers. November's decline of -$17.5B was the worst one month decline since the index began in 1943.Is it the fault of banks and their tight standards? We think it is a combination of tight credit and continued deleveraging.

Last week the National Association of Realtors reported that pending home sales for November plunged -16.0% after rising +3.5% in October just ahead of the original deadline for the first-time home buyer tax credit.

The employment picture is what we are focusing on and how it will play out for our recovery.

This week will shed more light on the consumer with December's retail sales numbers. Expectations are for a slower increase, +0.6%, than we have seen for the two months prior. Friday's consumer price index is expected to show a slight easing in pricing pressures but given the rise in oil prices, may surprise to the upside. Our manufacturing capacity is expected to show improvements for December but is still below the 36 year average of 79.6% from 1972 to 2008. Industrial production is expected to continue to be positive but at a slightly slower pace. Lastly, we have $84B in new Treasury financing which we expect to add to the bearish sentiment in the interest rate markets.